Jump in World Factory Costs Raises Inflation Risk

Factory input costs rose across the globe in February, the latest sign of brewing inflation pressures, as manufacturing in the United States and the euro zone grew at the fastest pace in years.

The sector accelerated too in India and Britain, where the expansion was the fastest in nearly two decades. But in China, where authorities have been trying to cool the economy, factory growth was the slowest in six months.

Overall, the February purchasing managers' indexes on Tuesday provided the latest evidence of growing inflationary pressure from a sharp rise in commodity prices.

Crude oil prices hit 2-1/2 year highs last week on supply concerns after uprisings in Libya.

"With the latest surge in commodity prices yet to fully feed through into consumer prices, inflation could well climb further in the next few months," said Martin van Vliet at ING.

The spike in oil prices has stoked fears that a sustained rise in commodity prices, from metals to grains, could weaken demand and derail the global economic recovery,

Still, Federal Reserve Chairman Ben Bernanke argued the latest surge in oil prices will not have a relevant impact on the U.S. economy. A sustained price spike, however, could lead to weaker growth and higher inflation, he warned.

"The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation," Bernanke told the U.S. Senate Banking Committee.

The U.S. manufacturing sector grew in February at the fastest rate since May 2004, and was stronger than expectations. Prices paid by manufacturers rose, but less than forecast.

In the euro zone, the output price index in the 17-nation bloc hit a record high for a survey conducted Feb. 11-21, before oil prices spiked again last week.

Sustained high oil prices of $110 to $120 a barrel could damage the global economy, the head of the International Monetary Fund, Dominique Strauss-Kahn, warned on Monday. U.S. crude prices were first below $100 a barrel on Tuesday.

INFLATION ABOVE TARGET

Consumer prices for the euro zone rose 2.4 percent year-on-year last month, above the European Central Bank's target of just below 2 percent. The European Commission now expects inflation for the bloc to finish above the target this year, at 2.2 percent.

The ECB is unlikely to abandon its ultra-loose monetary policy when it meets Thursday, but economists anticipate an interest rate hike by the fourth quarter of this year. The Fed is also expected to remain on course with its plan to buy longer-term Treasury securities to boost economic growth.

Europe's PMIs showed manufacturing growth across the euro zone, driven mostly by Germany's strong recovery, picked up in some economies on the periphery. In debt-stricken Ireland, manufacturing activity hit an 11-year high.

In India, factory input prices rose at the fastest pace since the records for the PMI began in 2005. India's inflation remains the highest of any major Asian economy even after seven rate increases in a year.

"Manufacturers are facing ever steeper increases in input costs, reflecting the tightness of labor markets and rising material costs, which will continue to add upward pressure on output prices," said Leif Eskesen, chief economist for India and ASEAN at HSBC, which sponsors the index.

CHINA BRAKES

China PMIs showed that manufacturing growth slipped to its slowest pace in at least six months, a sign that the government's campaign to tame inflation was having an effect.

But gauges of factory input prices still hit three-month highs in both China's official PMI and a private-sector PMI sponsored by HSBC.

Many of China's businesses were shut or running at half speed in the first part of February as China celebrated the Lunar New Year holiday, making it difficult to draw firm conclusions, though the PMIs are on a mild downward trend.

Since October, China has raised banks' required reserve levels five times to a record high, increased interest rates three times, and also ordered banks to lend less.

Lending by Chinese banks remains excessively fast, topping the "extreme upper limit" set by regulators, the country's banking chief said at an internal meeting at the start of this year, a source told Reuters Tuesday.